IFI governance

Background

The challenges of financing infrastructure in developing countries through PPPs: A focus on contracts and laws

11 October 2017 | Minutes

Pthoto: Robin Stevens

Summary

Notes from the 2017 World Bank and IMF Annual Meetings session on financing infrastruure in Latin America through PPPs. PPPs are promoted as a financing mechanism for infrastructure projects with mixed results for the environment/climate change, human rights and participatory processes. The WBG is a lead player in this field by providing advice and finance to PPP projects. This session aims to discuss the main challenges pose by the widespread promotion of PPPs and its impacts in particular Latin American cases.

Need for better project selection and more nuanced analysis of role of private sector investment.

These trends are taking place in context of rising debt levels, global warming and increased competition.

Rui Monteiro

Focus on contract management. Previously worked with Government of Portugal to negotiate and design PPPs.

PPPs remains a small part of public procurement. Potentially useful but dangerous. PPPs require robust regulation. WBG is pushing for better, not more PPPs.

Most PPP projects will be small and medium, not mega projects. Believe that there is good knowledge worldwide to develop good PPP projects. However good PPPs require good legislative framework. Governments require capacity to understand PPPs. PPPs also require transparency – including performance reports and costs.

In several topics, Latin America has good practice – eg, transparency is quite high, even compared to Europe and North America. Many finance ministries have PPP units. However Latin America suffers from too many contract re-negotiations. In Latin America renegotiations are not accidental as in many cases initial contracts are awarded for below cost projects.

Shares many of the concerns present in PPP manifesto.

Nancy Alexander

Noted lack of consultation on fourth generation contract used in Colombia. Hopes this will change resulting from the annual meetings.

Latin American countries have developed ‘better environment framework’ to ‘facilitate’ investment.

What are main characteristics of ‘good performing’ countries? Have general PPP laws with other laws. Colombia has quite significant experience, however it is the only country in Latin America that does not publish information on PPP performance.

Colombia 4th generation road programme – high priority

Questions having been raised about corruption within large projects.

Rui Monteiro

Corruption is an infrastructure issue, not necessarily limited to PPPs.

David Cruz

WBG has focused on support to upstream legislative work through development policy loans.

In Brazil – also significant corruption allegations. There has been much PPP activity at the subnational level in Brazil.

Pía Marchegiani

New legal framework for PPPs in Argentina – in force since 2016.

New administration – priority to solve default issue. Chinese investment has been important during the period in which Argentina was out of capital markets.

New administration is banking on new mega infrastructure plan. Largest in country’s history. However the country ‘lacks resources’. $169 billion potential pipeline – PPPs will be an important part of the strategy.

FARN has undertaken a study of new law (although study lacks access to contracts):

PPP law does state the importance of Public Interest. However many caveats that could constrain the evaluation of public interest.

While law notes equitable distribution of risk, the operationalisation of this is unclear.

Many of the positive aspects of the law come with many caveats. WB is providing technical support to Argentina.

Assessments demonstrate that much of the resources (50% for infrastructure) will come from the private sectors. Strong pro-PPP bias.

Seeks to increase infrastructure investment from 2.6 to 3.5% of GDP.

Nancy Alexander

Referencing unrest in Colombia to contractual clause in WBG PPP contractual guidelines that would penalise states for civil unrest/ demonstrations in the context of shrinking civil society space.

Motoko Aizawa

Previously a lawyer who has negotiated PPP contracts.

WBG places excessive risks on public sector to attract private investment. Experienced lawyers have noted, after reviewing the Bank proposal that guidance seems written by private sector lawyer.

Force Majeure – inconsistence with international jurisprudence. Similarly, change of law provisions, offers that states could take all the risks of changes in legislation needed to legislate in the public interest.

Many of the states that require investments also have weak environmental and social protection legislation. The current change of law provision would penalise states which try to bring social and environmental standards up to international level.

Guideline does not explain consequences of accepting arbritration outside local jurisdiction.

After discussions with CSOs, WBG has agreed to re-visit the current guidelines. WBG continues to work on numerous other tools. These tools should allow CSOs to engage in the initial stages of project development/ consideration.

Information about Observatory of on Sustainable Infrastructure:

Independent information clearing house. Transparency, accountability and best standardisation of tools. Will also focus on enhanced civil society participation in early stages of infrastructure selection/ discussion.

Nancy Alexander

While it is true that CSOs and WBG continue to discuss the guidance note, it will be rolled out by Bank in South Africa in November.

Rui Monteiro

Clear that the next version will have substantial changes. Also, only specific topics, excluding transparency/ disclosure. Similarly with environmental and social risks – These should be addressed in country’s general law. Bank advises countries to avoid special laws to regulate PPPs.

Contracts are not normally the central problem – the main challenges remain selection of bad projects and design (with frequent renegotiations).

Would call on CSOs to hold PPP managers to account based on results outlined in a contract – which is not the case in ‘normal’ public procurement.

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